History Repeating Right On Schedule

The following is an excerpt from commentary that originally appeared at Treasure
Chests for the benefit of subscribers on Tuesday, July 28th, 2009.

Just about everybody has heard the truisms 'history repeats', and if this
is not true 'history rhymes', however it's been my observation that a far as
present day stock market participants are concerned, not many take the validity
of these statements as seriously as they should. After all, people are people
right, even if they were acting in the context of another era, and in this
case, other market bubbles. This is the important understanding that many are
missing you see, that people are no different in the way they react to extreme
market conditions (stress) today than they were during previous post crash
episodes, including those that inspired Charles Mackay to pen the timeless Extraordinary
Popular Delusions And The Madness Of Crowds all those years ago now.

And while exact details and patterns can for the most part only rhyme in full
measure, without a doubt this is one of those instances where you do want to
'sweat the small stuff', because in doing so one would be missing close enough
approximations to model future trading decisions on that have proven very profitable
indeed. Or at a minimum, such information, if believed, could have prevented
trading losses for those who attempted to capitalize on the recently foiled
head and shoulders pattern that characterized the major averages. Many unknowing
speculators attempted to do so and lost money, which is of course common when
trades get crowded in mature markets. The markets become like casinos you see,
with the house (knowledgeable speculators) having the advantage.

Now you might be thinking I am referring to the boys down at Goldman Sachs
here, where as mentioned the other day it appears they front run the Uncle
Sam accounts so that when they are executing the bureaucracy's wishes, they
make big
profits in the process. But no, I am not referring to these guys as being
knowledgeable speculators. If left out of the bureaucracy's loop, these guys
would likely loose money, as it's probably been 'too easy for too long' being
plugged into the information pipeline from Washington. No, I am referring to
you and me, guys who do our homework, and stay sharp, as it's the laws of the
jungle for everybody else outside of the loop.

Along these lines, and in following up on which historical pattern would dominate
from last
week, it appears the winner was Figure 2, courtesy of continued gains in
the stock market. And as you will see below, if we see more gains this week
(and possibly next), which appears likely at this point, then, as opposed to
history simply rhyming in this case, we could have an exact pattern match between
the S&P 500 (SPX) and post crash pattern of the Nikki measured in calendar
days. What's more, and to frame this in the proper context as per above, it
appears in terms of the high
degree events we are working with these days, history is repeating right
on schedule if that's possible, making our job as speculators far easier in
terms of positioning decisions. (See Figure 1)

As you can see above, if the pattern match is to persist, then the SPX should
see the large round number at 1,000 breached as we move into August (the first
few days of a new month are usually strong due to window dressing overlap and
systematic fund buying), only to end up consolidating under the mark for several
months before gaining enough steam to sustain a move above this key resistance
level. So, since all equities appear to be joined at the hip, with the dollar
($) central in the story, it appears support at 78 should be breached this
week, with a spike down to 76 likely in reaction to this, followed by a tradable
bounce afterwards considering the positive divergences in the indicators. (See
Figure 2)

Figure 2

One thing is for sure, if the $ doesn't break lower this week with the Treasury
issuing almost a quarter trillion in bonds, then the extended five-wave sequence
in the $ will fail, and not only will the bounce start sooner than anticipated,
but also the historical pattern similarity in Figure 1 will go flying out the
window, along with a good number of my long positions. So keep your eye on
the almighty $ this week, and the success of US bond auctions, where a smooth
showing would be just what the doctor ordered in terms securing the spike lower
in the $ we are expecting. I see the $ is bouncing off support this morning,
but don't let that fool you. This is just traders getting nervous at what they
think might be a double bottom.

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